9 Deeply Undervalued Companies

David Steinberg: The stock market has been significantly changed since 2008. There's been massive risk aversion. That's the main premise as to what's really taken place. There's been a large flight to fixed income, which are perceived to be quality investments, and to the highest-quality, safest stuff in stock markets around the world. There's been, also, a flight away from things that have been traditionally more risk oriented, like emerging markets equities and cyclicals.

Even Europe has underperformed despite the many large capitalization stocks. That has put many securities at very significant discounts. What we do at DLS Capital is buy deeply undervalued companies. I f you look at the historic metrics of the valuations of cyclicals versus staples or the S&P, they're selling at about a 40-year low as indicated in the chart below that we think provides a good insight into where we want to be putting our money.

There are two other additional variables that are driving the same decision: One, there's been a tremendous amount of theoretical currency printing, or factual currency printing, which could end up being a currency debasement. That would favor basic materials companies over time.

And, number two, you've got a big demographic variable that drives the emerging markets. You've got 7 billion people in the world. Only maybe 1 billion live in the developed countries. But, going forward, you've got 6 billion in emerging markets that are going to drive per capita demand for many types of commodities and products.

So with that as a background, and with the cyclical companies undervalued, we think you can find a lot of value in companies that service both emerging markets and have aggregate assets.

Wally Forbes: Sounds like a good case.

David: Some of our holdings are at multi-decade lows, such as Freeport McMoRan (FCX). They are the largest copper provider in the world.
Teck Resources, out of Canada, which has metallurgic coal, copper, zinc, iron ore, and so forth;
Rio Tinto, which is probably one of the largest iron ore producers in the world; and also some of the coal companies that are now down on their backs such as Arch Coal (ACI) or
Alpha Natural Resources.

These are all material and natural resource-based companies and they've been really punished over the last couple of years due to expectations of slower growth in emerging markets. Granted, emerging markets have slowed. But they're still growing faster than developed countries. And they're still using many of these products, and will continue to do so, as they expand over time.

So we think when you look at the dividend yields on most of these (not all have dividends, but most of them have pretty fat dividend yields), as well as what the core demand is going to be abroad for their products over the long run, and the valuation differentials, it gives us what we think will be a great long-term edge for the investor who wants to take a look into that area of opportunity.

Wally: When people are running away from things that can give you value opportunities.

David: Sentiment drives markets in the short term. But sentiment can misprice asset classes and individual assets. The job of an investment manager is to be able to distinguish the difference between sentiment-driven pricing and factual asset pricing of the value of businesses.

By looking at historic metrics and by being disciplined enough -- despite the wind you're feeling in your face -- when you're a contrarian-oriented investor, you can have the courage and conviction to buy some of these deeply out-of-favor situations. It also gives you an anchor that you can allow yourself to rely on to maintain a good rational balance as to why you've been invested in these particular areas.

Knowledge is power and knowledge gives you the courage of your convictions. So look for out-of-favor groups; and then we want to try to take advantage of the opportunity this can provide and then have the patience to be able to reap our rewards.

Wally: You gave us five stocks there that are in the resource-based area. Any others?

David: Aside from those in the resource-based area, we've also found a lot of value in what we would call "Old technology." Those include companies such as Hewlett Packard (HPQ), which has been significantly undervalued based on a lot of management changes, which have taken place over a number of years. It has had a great year so far this year, and we think that it has got considerably more appreciation potential.

Another is
Micron Technology (MU), which makes semiconductor and random access memory chips. That industry group went from 10, 20, 30 companies 15 years ago, to an oligopoly now. We think you're going to see strong pricing in those areas of the market. And we think that is going to be potentially another stellar performer derived from an old technology.